During the last two years Community Health Systems has reshaped the landscape between its two Scranton hospitals, purchasing more than a dozen properties and paying contractors to demolish at least seven structures.

Company officials refuse to disclose their plans for the two-block neighborhood between Regional Hospital of Scranton and Moses Taylor Hospital, which Community Health Systems took over in May 2011 and January 2012, respectively. However, the frequent demolition activity has fueled speculation the for-profit company is on the verge of a large-scale expansion project.

Since October 2012, the Franklin, Tenn.-based company has invested at least $2.67 million to buy area properties, including 15 of the 21 properties it did not already own between the hospitals, according to a Sunday Times analysis of records.

Based on the proximity, common ownership, finances and overlap in services, industry experts predict the company plans to convert it into one campus and consolidate services.

“It makes an enormous amount of economic sense,” said Joshua Nemzoff, a health care expert in mergers and acquisitions. “Given the high level of fixed costs at these hospitals, if you can consolidate onto one campus … it’s usually a very positive (economic decision). There are very few reasons why you wouldn’t do that.”

Records show trend

The newspaper analyzed documents from the Lackawanna County Assessor’s Office, records from the county’s Recorder of Deeds and city-issued building permits obtained through a Right to Know Law request. The newspaper found:

 Since Oct. 18, 2012, Community Health Systems — mostly operating under the name “McKenna Court Homes LLC” — purchased at least 15 properties on the city blocks between the hospitals, including six the hospitals later got a permit to demolish. Nine of the properties contained multi-dwelling units, two had a single-dwelling unit and four were vacant lots.

 Community Health Systems paid a premium for the properties, spending in some cases more than four times the fair market value. For example, the company paid $339,000 to Two Cat Realty LLC for 737-739 Monroe Ave., which has a fair market value of $83,139, according to a realty transfer tax statement of value.

The city has issued at least seven building permits to the hospitals for the demolition of vacant homes or other structures between the hospitals. Six were issued between Sept. 25 and Nov. 8, 2013 .

 Six of the structures demolished were on the 700 block of Madison or Monroe avenues. Total demolition work is valued at $184,900, with $80,000 coming from the demolition of 742 Madison Avenue and 741-743 Quincy Avenue.

The construction activity corroborates what former Scranton Mayor Chris Doherty told the newspaper in the fall 2013, when he said the city expects to receive $1 million in permit and licensing fees in 2014 from a large-scale expansion project at Regional Hospital of Scranton.

Asked about the permits, purchase of properties and future plans in the area, Commonwealth Health officials responded in a statement: “Evaluation of our strategic plans for the future and the services we offer is an ongoing process. We look forward to sharing information with our community should any new plans become firm.”

City planner Donald King said he has not received any land development plans from Community Health Systems or either hospital regarding an expansion project. Neither has Steve Pitoniak, a senior planner on the Lackawanna County Regional Planning Commission.

Buying the neighborhood

Among the 15 properties Community Health Systems bought is 734-736 Madison Ave., previously owned by Michael and Michele Wilk.

Mr. Wilk said he was renting the multi-dwelling unit to students attending the Commonwealth Medical College about a year and a half ago when officials representing Community Health Systems inquired about the property.

He had seen neighbors sell their properties to the company, and though his was not listed for sale, Mr. Wilk entertained the offers. On Oct. 1, 2013, Community Health Systems, operating under the name McKenna Court Homes, bought the property for $300,000 — $230,000 more than the fair market value, according to a realty transfer tax statement of value.

“I think it’s fair to say they have been successful in acquiring (properties), and I’m sure they haven’t been able to do that by paying less than fair value,” Mr. Wilk said. “They seem to have bought almost the entire block.”

The office building at 720 Madison Ave. owned by Lear Von Koch, M.D., is among the few non-hospital owned properties remaining in the neighborhood. A private practicing cardiothoracic surgeon, Dr. Koch spends nearly all his work time at Regional Hospital of Scranton.

Though hospital officials have expressed their interest in his property, which he’s had since 1985, they have not tendered an offer, he said.

“I let them know that it’s my lifeline, and so no offer was ever forthcoming,” he said. “They keep hinting, insinuating that they want the property.”

About a year and a half ago, he said, hospital executives informed him of their plan to buy the properties between Moses Taylor and Regional Hospital, level the buildings and then connect each hospital to a “superstructure” in between — possibly a “mega emergency department.”

Officials never finalized the plans, and, in fact, recently made changes to them, he said. Dr. Koch said he has not seen the revised drawings, but said officials likely scaled back the original plans because of limitations as to how to connect the two hospitals.

“To physically connect Regional Hospital to whatever structure goes in that two-block area, and then to connect that structure to Moses Taylor Hospital means going uphill, and at certain angles and grades,” he said. “And then it involves the monolithic Moses Taylor Hospital (parking) garage ... and it might really involve tearing down the garage. And from what I understand that’s a problem, because tearing down the garage is not only a big deal, but what do you with all the parking. Everyone parks there.”

Investing in the future

Community Health Systems, which through its affiliates owns, operates or leases 208 hospitals in 29 states, pledged to invest more than $250 million across Lackawanna and Luzerne counties, with more than half of that spent in the Scranton market. In February 2012, the company announced the creation of Commonwealth Health, the largest network of hospitals in Northeast Pennsylvania, with eight regional hospitals, including Moses Taylor and Regional Hospital of Scranton.

So far, Community Health Systems has spent millions in facility upgrades and technology improvements, including implementing an electronic health record system, at its Scranton hospitals.

But the two acute-care hospitals appear to be headed in different directions financially.

While Moses Taylor posted a 6.6 percent operating margin, its highest margin in at least five years, Regional ended fiscal 2012 with a negative 15.92 percent operating margin, according to the Pennsylvania Health Care Cost Containment Council’s most recent financial analysis. The operating margin, which reflects the percent of revenue remaining after all expenses are paid, is one indicator of a hospital’s financial health.

Over the last year, the two hospitals have started coordinating services. In May 2013, Regional stopped admitting children to its pediatric unit, instead transferring them to a newly-developed Pediatric Center of Excellence at Moses Taylor.

A month later, Moses Taylor furloughed at least 25 of its employees, including two registered nurses. In July, Regional laid off some of its employees, according to SEIU Healthcare Pennsylvania.

Despite an effort to coordinate services, there remains a significant overlap in those offered at each hospital, including emergency medicine, family practice and general surgery, are also available at Moses Taylor, according to the hospital websites.

“Typically, when a for-profit system comes in and acquires community hospitals, they think they can either improve operations, cut out the fat or downsize the hospital to an appropriate capacity that the community can support,” said Alwyn Cassil, founder of Policy Translation, a Maryland-based health policy and communications consulting company.

“In this case, it makes absolutely no sense to have the overlap in services.”

With a third hospital in the city, Geisinger Community Medical Center, Community Health Systems must focus on increasing productivity and efficiency in order to remain competitive, she said.

“But when you have two of everything, such as emergency departments, it’s very hard to do that.”

Contact the writer:

miorfino@timesshamrock.com, @miorfinoTT on Twitter

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